Relying on marketing ALL-IN overseas, 51Talk(COE. US) can we see the breakeven line again?

As we all know, after the "double reduction" policy, domestic education and training institutions have transformed, and e-commerce live broadcast has become an important direction. Recently, the internal dispute of Dongfang Selection once again pushed the topic of the transformation of educational institutions into e-commerce live broadcasts on the hot search, and brought the e-commerce platforms of many education and training institutions such as Xueeryou and Gaotu to become popular on the Internet.

However, the transformation of e-commerce is not the basic operation of K12 education and training enterprises after the "double reduction", and the transformation path of different institutions is not the same. Unlike most companies that choose e-commerce live streaming and adult education and training tracks, 51Talk(COE. US) is all in overseas education.

Zhitong Financial APP learned that 51Talk recently announced its Q3 2023 financial performance report. Judging from the sequential growth in net income and student scale, the company seems to have embarked on an "ALL-IN overseas" transformation path.

Relying on the merger to "pull up" the stock price by 9 times

As one of the few enterprises focusing on the overseas education and training market among the many transformation education and training institutions that year, 51Talk was not favored by Wall Street at the beginning of the transformation.

In 2020, soon after 51Talk's share price reached the highest listed price of $37.19, the domestic education and training industry began to fluctuate, and before and after the introduction of the "double reduction" policy in 2021, the company's stock price fell sharply, and in the Q2 and Q3 quarters of 2021, the company's stock price fell by 61.52% and 66.67% respectively. In July 2021, 51Talk officially announced the launch of overseas business and plans to focus on overseas business after divesting its Chinese mainland business.

Therefore, from the decline in stock prices in Q2 and Q3 of 2021, it is not difficult to see that Wall Street was not optimistic about the direction of its transformation at that time.

On March 24, 2022, 51Talk released its 2021 annual financial report, disclosing that its annual net profit was 106 million yuan, a year-on-year decrease of about 28%. And on March 28, 51Talk announced that the company received a takeover offer from CEO Huang Jiajia, planning to acquire the company's entire business in Chinese mainland for $1, including all related liabilities and assets.

After a one-pass operation, 51Talk's stock price fell to $0.76 in Q1 2022, reflecting the peak of the market's pessimism about its future, but the company's performance exceeded expectations after that.

According to the 2022 Q2 quarterly report, 51Talk has completed the divestiture of its domestic business on June 30, 2022. After the divestment, it will mainly provide online English tutoring courses for overseas students. The company's net cash income for the period reached $7.8 million, an increase of 46.5% sequentially, with 14,900 active students, and the company's overseas business also achieved cash flow breakeven in May and June 2022.

Starting from Q3 2022, 100% of 51talk's revenue comes from the international market, and it continues to implement the localization strategy in the international market. And according to the information revealed by 51talk, the company has gone deep into more than 50 countries and regions around the world to provide English teaching services for students around the world.

Although it is undeniable that there is an order of magnitude gap between the business scale of 51talk after the transformation and before the transformation, the continuous business and performance recovery has also allowed the company's stock price to recover steadily.

Before the market on December 18 this year, 51Talk disclosed its 2023Q3 financial report, and after two trading days of a slight decline, on December 20, the company's stock price closed up again and fixed at $7.75.

However, it is worth mentioning that although the company's stock price has risen more than 9 times from the lowest point of $0.76 in the first quarter of 2022, this is not due to the increase in the company's stock price, but last year the company announced that it would change the American Depositary Shares (ADS) ratio from 15 ordinary shares per 1 ADS to 60 ordinary shares per 1 ADS. After the ratio change became effective on December 15, 2022, the ADS ratio change resulted in a 1:4 merger effect for 51Talk's ADS holders.

If you follow the stock price before the conversion, in more than 2 years, 51Talk's stock price has actually risen about 154.9% since its low.

The potential of the blue ocean of overseas education and training still needs to be explored

It is worth mentioning that 51talk has quoted third-party data to say that the global education technology market size will be about 107.3 billion US dollars in 2021, and it is expected to grow at a compound annual growth rate of 19.9% by 2028, especially in Southeast Asia, where English learning Xi is still a rigid demand in the overseas training market. However, judging from the current revenue scale of the company, 51Talk's potential in the blue ocean of overseas education and training still needs to be explored.

According to the financial report, the data showed that the company's total revenue in the third quarter was $10.9 million, close to the upper limit of expectations, an increase of 11.3% quarter-on-quarter and 137% year-on-year. The company's net income for the period reached $7.8 million, an increase of 23.8% sequentially and a year-on-year increase of 70.4%.

Behind the revenue growth, the number of active students in the company's actual consumption courses in the current period was approximately 36,000, an increase of 84.6% from 19,500 in the third quarter of 2022.

However, in order to expand its scale, 51talk's sales and marketing are still its main expense items, which were US$5.109 million in the Q2 quarter of this year, and further expanded to US$6.905 million in the Q3 quarter, accounting for 88.2% of the company's net income in the current period. In contrast, the company's headcount remained unchanged overall, while other businesses remained in a state of continuous development, which was mainly reflected in the Q3 quarter, the company's administrative expenses were basically the same as the previous quarter, and R&D expenses were US$868,000, an increase of 25.1% from the previous quarter.

In addition, 51Talk's revenue model is to receive the advance payment first, and the user will only be recognized as revenue after the class is completed. Therefore, the size of the advance payment from students becomes an important indicator to measure the company's future revenue. According to the data, as of the end of September this year, 51Talk's student advance payment reached 23.69 million US dollars, which means that in the first three quarters of this year, the student advance payment increased by 85.23 million US dollars compared with last year. This also reflects the growth of 51Talk's business in Southeast Asia and other parts of the world.

In terms of English language Xi, the market estimates that there are more than 1.5 billion adults learning English Xi worldwide, and this market is currently worth around £5 billion, with the market set to grow to £7.3 billion by 2025. There are huge opportunities in the English language sector in many markets in Asia, such as Southeast Asia.

According to Huang Jiajia, CEO of the company last year, from a regional point of view, 90% of 51Talk's users are distributed in Southeast Asia. 10% of users are outside of Southeast Asia.

According to the Business Times, Southeast Asia is home to nearly 700 million people, with 26 percent of the population being of school age. What's more, over the past five years, the population of ASEAN countries has grown at a CAGR of 1.2% and China's 0.6%. In the context of continuous population growth, the fertility rate has also become an important factor in judging the prospects of the education market.

Statista data shows that in 2020, India and ASEAN had similar fertility rates, with an average of 2.2 babies per woman. Among them, Laos, the Philippines, Cambodia and Indonesia all have above-average fertility rates. With the dual advantages of population growth and fertility growth, the number of school-age people in Southeast Asia is expected to further increase, making it an important user base for education companies.

From the perspective of the Southeast Asian education market, in addition to K12 teaching tutoring, linguistics Xi education companies have also seized a place in Southeast Asia, and English learning Xi is an important part of it. With the cost advantage of the Philippine foreign teacher supply chain, 51Talk was able to quickly open up the Southeast Asian market.

According to the financial report data, in the first quarter of last year, 51Talk's overseas business achieved positive cash flow in only 8 months. In the third quarter of this year, the company's cash balance increased by $1.2 million compared to the previous quarter. The cash flow situation continues to improve. However, at present, 51Talk has not given a specific profit schedule, and the company's net loss for the current period has reached 3.9 million US dollars, which is further expanded compared with the same period last year. Judging from the company's current marketing efforts, it seems that it is too early for 51Talk to talk about profitability.